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England and Wales Court of Appeal (Civil Division) Decisions
You are here: BAILII >> Databases >> England and Wales Court of Appeal (Civil Division) Decisions >> Dear & Anor v Jackson  EWCA Civ 89 (22 February 2013)
Cite as:  EWCA Civ 89,  1 BCLC 186
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ON APPEAL FROM THE HIGH COURT CHANCERY DIVISION
The Hon. Mr Justice Briggs
Strand, London, WC2A 2LL
B e f o r e :
LORD JUSTICE LEWISON
LORD JUSTICE McCOMBE
| PATRICK GILES GAUNTLET DEAR
READE EUGENE GRIFFITH
|- and -
|ALEXANDER EDWARD JACKSON
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David Chivers QC and Philip Gillyon (instructed by Fladgate LLP) for the Respondent
Hearing date: 6th February 2013
Crown Copyright ©
Lord Justice McCombe:
(B) Background Facts
(C) The Preliminary Issues
"(i) Mr Jackson would not be removed as a director of TFG; and
(ii) The parties to the agreement in cl. 5(b) of the Agreement, namely Messrs Dear and Griffith and PCH II would procure that Mr Jackson would not be removed as a director of TFG";
and secondly, whether
"By reason of clause 7, the parties to the Agreement are required: (i) To give effect to clause 5 of the Agreement; (ii) Not to invoke article 88(e) of the articles of TFG in order to remove Mr Jackson from office as a director of TFG; (iii) Not to invoke any other power to remove Mr Jackson from office as a director of TFG and (iv) To take steps formally to disapply, delete or amend article 88(e) of the articles of association of TFG so as to remove the power of removal therein set out insofar as it might otherwise be invoked against Mr Jackson. Provided in the case of (ii) to (iv) inclusive above that a clause 5(b) Termination Event has not occurred".
(D) The Articles of TFG and the Agreement
"22. By article 80:
"Unless otherwise determined by Resolution of the Voting Shares, the number of Directors shall be seven. At no time shall a majority of Directors be residents of the Untied Kingdom."
23. By article 81, subject to provisions dealing with their death, resignation or removal, and the filling of vacancies, not less than a majority of directors were to be Independent Directors (as defined by reference to the standards set forth in the UK's Financial Reporting Council's Combined Code of Corporate Governance).
24. Under the heading Powers of Directors, article 83 provided as follows:
"(a) Subject to the provisions of the Law, the Memorandum and these Articles and to any directions given by Resolution of the holders to Voting Shares, the business of the Company shall be managed by the Directors, who may exercise all the powers of the Company in any part of the world. No alteration of the Memorandum or these Articles and no such direction shall invalidate any prior act of the Directors which would have been valid if that alteration had not been made or that direction had not been given. The powers given by this Article shall not be limited by any special power given to the Directors by these Articles, and a meeting of Directors at which a quorum is present may exercise all powers exercisable by the Directors.
(b) Subject to the Law, every discretion vested in the Directors shall be absolute and uncontrolled, and every power vested in them shall be exercisable at their absolute and uncontrolled discretion, and the Directors shall have the same discretion in deciding whether or not to exercise any such power."
25. Under the heading Appointment and Retirement of Directors, article 86 provided as follows:
"The holders of Voting Shares by Resolution shall have power at any time, and from time to time, to
(i) appoint any person to be a Director, either to fill a vacancy or as an additional Director (subject to the eligibility requirements hereof and any requirements of the Law), and
(ii) remove any person from office as Director for any reason."
Article 87 provided for a director to retire from office by giving notice.
26. Under the heading Disqualification and Removal of Directors, article 88 (which contains the provisions principally in issue in these proceedings), provided as follows:
"Without prejudice to the provisions regarding retirement contained in the Articles, the office of a Director shall be vacated if:
(a) he ceases to be a Director by virtue of any provision of the Law or becomes prohibited by law from, or is disqualified from, being a Director; or
(b) he becomes bankrupt or makes any arrangement or composition with his creditors generally; or
(c) he resigns his office by notice to the Company; or
(d) he becomes of unsound mind; or
(e) he is given notice by all other Directors (not being less than two in number) to vacate office;
(f) he is absent from meetings of the Directors for four successive meetings without leave expressed by a resolution of the Directors and the Directors resolve that his office should be vacated; or
(g) the Company so resolves by Resolution of the Voting Shares; or
(h) he becomes a resident of the United Kingdom and, as a result thereof, a majority of the Directors are residents of the United Kingdom."
It will be noted that provisions in article 88 repeat, dovetail or otherwise overlap with provisions in articles 80, 86 and 87 to which I have already referred.
27. Under the heading Proceedings of Directors, article 93 provided that a resolution of the Directors required the affirmative vote of five Directors, provided that a quorum was present. Finally, under the heading Amendments, article 142 provided that subject to the requirements of the Law (defined as Guernsey company law) and article 12, the articles could only be amended by Resolution of the Voting Shares."
"(a) This section 5 shall become operative upon receipt by Dear and Griffith of a written notice from Jackson prior to October 30, 2008 notifying them that Jackson wishes to be a director of Tetragon.
(b) Subject to Section 5(a) above, Jackson, Griffith, Dear and PCH II agree that (i) at the next annual shareholders meeting for Tetragon Financial Group Limited, a Guernsey company ("Tetragon"), which shareholders meeting is expected to be held prior to December 31, 2008, PCH II shall, subject to applicable laws, (including applicable stock exchange and regulatory requirements), (A) nominate each of Jackson, Griffith and Dear as the sole non-independent directors of Tetragon (each a "TFG Non-Independent Director") and (B) vote all shares of Tetragon held by PCH II at such shareholders meeting in favour of the appointment of each TFG Non-Independent Director as a non-independent director of Tetragon and (ii) subject to applicable laws (including applicable stock exchange and regulatory requirements), to continue to nominate, and to vote all shares of Tetragon held by PCH II in favour of the appointment of Jackson as a TFG Non-Independent Director at each subsequent annual shareholders meeting for Tetragon; provided, however, that such right of Jackson to be nominated and reappointed shall terminate and the shares of Tetragon held by PCH II may be voted to remove Jackson as a director of Tetragon if Jackson (i) breaches his fiduciary duties or other obligations as a director of Tetragon under applicable laws (including applicable stock exchange and regulatory requirements), (ii) is found pursuant to a judgment by a court of competent jurisdiction, to have engaged in or to be responsible for fraud or wilful misconduct, (iii) is found by a competent authority not to be a fit and proper person to be involved in a regulated business or is otherwise disqualified from being involved in any part of the business of Tetragon or any of its subsidiaries or affiliates, (iv) transfers his interests in PCH and PCH II such that he holds, directly or indirectly through controlled affiliates, less than 15% of the aggregate voting and economic interests of either PCH or PCH II and their respective subsidiaries or (v) resigns as a director of Tetragon and notifies Griffith, Dear and PCH II that he does not wish to be reappointed as a Tetragon director; provided, further, however, that in the event Griffith or Dear transfer their shares in PCH II to a controlled affiliate (including, but not limited to, in the case of Griffith to REG Holdco), such transfer shall not be effective unless and until such transferee agrees to be bound by this Section 5…...
7. Further Assurances. The parties agree to take such other actions as may be reasonably required to authorise, approve and otherwise give effect to this Agreement. The parties also agree that each of Griffith, REG Holdco II, Jackson, AEJ Holdco and Dear have the right to request that the interests that each currently holds in PCH or any subsidiary of PCH (each a "member of the PCH group") be restructured to the extent necessary such that the income and profits of such member of the PCH Group is received by such person in a tax efficient manner, provided, however, that any such restructuring does not adversely affect any other party's interest in any member of the PCH Group. The parties acknowledge that this may require a party to be granted a direct interest in a member of the PCH Group not currently held directly."
(E) The Law on Construction and Implication of Terms
(i) Construction (or as I would prefer to call it interpretation) is, in relation to any point at issue, the ascertainment of the meaning which the document would convey to a reasonable person having all the background knowledge which would reasonably have been available to the parties in the situation in which they were at the time of the contract.
(ii) For that purpose, even though the point in issue may be a narrow one, the interpretation of the relevant provision depends upon an understanding of its context within the agreement as a whole.
(iii) The court's function is to ascertain the meaning of the agreement rather than to seek to improve upon it, or put right any inadequacies of meaning. Nonetheless the court recognises that draftsmen may make mistakes, may use occasionally inappropriate language and may fail expressly to address eventualities which may later occur.
(iv) the implication of terms is no less a part of the process of ascertaining the meaning of an agreement than interpretation of express terms. Implication addresses events for which the express language of the agreement makes no provision.
(v) In such a case the usual starting point is that the absence of an express term means that nothing has been agreed to happen in relation to that event. But implied terms may be necessary to spell out what the agreement means, where the only meaning consistent with the other provisions of the document, read against the relevant background, is that something is to happen.
(vi) Although necessity continues (save perhaps in relation to terms implied by law) to be a condition for the implication of terms, necessity to give business efficacy is not the only relevant type of necessity. The express terms of an agreement may work perfectly well in the sense that both parties can perform their express obligations, but the consequences would contradict what a reasonable person would understand the contract to mean. In such a case an implied term is necessary to spell out what the contact actually means.
Commercial common sense
(vii) The dictates of common sense may enable the court to choose between the alternative interpretations (with or without implied terms), not merely where one would "flout" it, but where one makes more common sense than the other. But this does not elevate commercial common sense into an overriding criterion, still less does it subject the parties to the individual judge's own notions of what might have been the most sensible solution to the parties' conundrum."
"…..There is only one question: is that what the instrument, read as a whole against the relevant background, would reasonably be understood to mean?
22. There are dangers in treating these alternative formulations of the question as if they had a life of their own. Take, for example, the question of whether the implied term is "necessary to give business efficacy" to the contract. That formulation serves to underline two important points. The first, conveyed by the use of the word "business", is that in considering what the instrument would have meant to a reasonable person who had knowledge of the relevant background, one assumes the notional reader will take into account the practical consequences of deciding that it means one thing or the other. In the case of an instrument such as a commercial contract, he will consider whether a different construction would frustrate the apparent business purpose of the parties. That was the basis upon which Equitable Life Assurance Society v Hyman  1 AC 408 was decided. The second, conveyed by the use of the word "necessary", is that it is not enough for a court to consider that the implied term expresses what it would have been reasonable for the parties to agree to. It must be satisfied that it is what the contact actually means.
23. The danger lies, however, in detaching the phrase "necessary to give business efficacy" from the basic process of construction of the instrument. It is frequently the case that a contract may work perfectly well in the sense that both parties can perform their express obligations, but the consequences would contradict what a reasonable person would understand the contract to mean."
(F) The Rival Arguments in Outline
"6. The preliminary issues of construction concerned the extent of protection from removal conferred by the Shareholders Agreement on the Respondent, and in particular whether it protected him from removal from office otherwise than by PCH II. By its express terms, the Shareholders Agreement only addresses appointment and removal at shareholder level by PCH II: it is silent as to the Respondent's vulnerability to disqualification to hold office, or removal, as a director under TFG's Articles.
7. Briggs J found the issue "finely balanced" (J § 52²), but he decided that on its true interpretation the Shareholders Agreement protected the Respondent from removal not only by PCH II, but also by the six other directors of TFG (the four independent directors and the two Appellants) exercising a fiduciary power of removal conferred by TFG's Articles.
8. In so doing, the judge re-wrote the parties' bargain to reflect what he thought would have been a reasonable agreement…..
10. The judge ought to have held that the Shareholders Agreement only legislated for the appointment and non-removal of the Respondent by PCH II, and did not impact on the exercise by the directors of TFG, its subsidiary, of distinct powers conferred on TFG by its Articles. In short, the express (and only) agreements of the parties were that they would ensure that PCH II did use its voting power to appoint, and did not use its voting power to remove, the Respondent as a director of TFG; otherwise he was like any other director to TFG, to hold office on the terms of the constitution of TFG, including the constitutional restraints on qualification."
"3. Mr Jackson's case is simple.
3.1 The Appellants have agreed to the re-appointment of Mr Jackson until the happening of a Termination Event.
3.2 As matters stand, any re-appointment of Mr Jackson would serve no useful purpose because the Appellants will, immediately upon his appointment, join in removing him as a director.
3.3 The parties did not intend that the obligation to re-appoint would either cease, or serve no useful purpose absent a Termination Event.
3.4 Accordingly, to give effect to the intentions of the parties, it is necessary that either:
(i) The Appellants must not vote to remove Mr Jackson as a director; or
(ii) If (as the Appellants allege) they are obliged to vote to remove Mr Jackson as a director, then they must remove that obligation – it being within their power to do so.
3.5 This necessity can be expressed either as an implied term of the Agreement or as part of the general obligation of a party not to render performance of an agreement futile. It can also be expressed as the performance of a separate obligation (under clause 7) to give effect to the Agreement."
i) Clause 5 of the Agreement addresses the very subject matter with which the suggested implied term is concerned. Therefore, one must exercise caution in going beyond it.
ii) Clause 5 is silent about whether or not it disentitles Mr Griffith and Mr Dear from joining in a directors' notice under Article 88(e); thus, the starting point is that nothing is to happen in that respect;
iii) It is not necessary for the commercial workability of the Agreement (and in particular clause 5) to imply a term requiring any party not to join in a notice proposed to be given under Article 88(e) (even, I interpolate, if the commercial objective of one party was to achieve a different result).
iv) It is not obvious that the parties would have agreed the suggested implied terms. There are tenable reasons for differing views being taken: see above.
v) There is reason to think that the terms proposed would result in the suspension, for an unlimited period, of a potentially useful power available to the directors.
vi) If, on its true meaning, clause 5 does not require the implication of terms, then clause 7 does not take the matter further.
vii) Equally, if such implication is not otherwise required, then the operative circumstances of the contract are defined by the express terms and it cannot be said that the participation by Mr Griffith and Mr Dear in a removal of Mr Jackson would frustrate clause 5, contrary to the principle in Stirling v Maitland (1864) 5 B & S 840.
"Where parties have entered into written engagements with expressed stipulations, it is manifestly not desirable to extend them by any implications: the presumption is that, having expressed some, they have expressed all the conditions by which they intended to be bound under the instrument."
To the same effect is the following from MacKinnon LJ in Broome & anor. v Parkless Co.-Op. Society etc.  1 All ER 603, 612:
"Where the parties have made an express provision as regards some matter with regard to the contract, it is, and must be, extremely difficult for either of them to say in regard to that subject-matter, as to which there is an express provision, that there is also an implied provision or condition in the contract."
Lord Justice Lewison:
Lord Justice Laws.